Professor Colleen Chien from Santa Clara Law spoke at the December 10 DOJ/FTC troll conference. As a follow up to the conference, she offered IAM Magazine her thoughts attempting to put our current troll situation, which she acknowledges is “disruptive” for business, with two other historical periods of increased troll activity involving railroads and sewing machines. Of course, the sewing machine incident ended with four parties cross-licensing nine patents. That alone shows that the scope of today’s problem — more than 50% of 2012 patent cases were filed by trolls — is vastly different than Chien’s historical examples. Chien acknowledges that to a degree, but does not seem to give it enough weight, or much at all. Instead, she believes that the market will correct the problem as companies formulate responses to even out the current inequities and provide a stability that is “some years away”:
As I said at the FTC/DOJ hearings, in recent years, [Patent Assertion Entities] PAEs have presented a disruptive and innovative business model that has made patent enforcement much cheaper, less risky, and easier to use to tap into the value of patents, giving holders of valuable patents that were once shut out of the licensing market new access. As we write our own patent history, it should be no surprise that many sectors of the innovation ecosystem – from competition authorities, to the courts, to Congress, to the investment community, to companies large and small – are engaged in contemplating and formulating their appropriate responses to this new business model. Exposing the potential efficiencies and harms of the PAE business model, as the FTC/DOJ hearings did, provides a valuable service in moving us towards a steady state in the patent monetization industry that is still some years away.
That reminds me of a recent RPX blog post that succinctly explained that trolls are a complex market-based problem that require market-based solutions. (Full disclosure: I was recently selected as one of the lead trial counsel for RPX Insurance Services’s new insurance program that insures retailers, and businesses generally, against troll suits.) The thrust of RPX’s argument is that legal solutions cannot adequately solve a market problem:
While we share [Jeff Bezo’s] belief that the patent problem has grown to the point where only a broad-based, fundamental solution can restore order, we don’t agree that legislation or government regulation can be the sole source of that solution. After all, the America Invents Act is a year old now and it hasn’t really lessened the impact of NPEs on operating companies.
* * *
At RPX, we applaud any efforts to rationalize the patent ecosystem, but we don’t think legislation should be the primary focus. This is trying to apply a legal solution to a legal problem. But NPE risk is a market problem. Patents are, after all, assets. There may be too many patents with too many overlapping claims in circulation, but the fact remains that these patents exist and can be credibly interpreted as being infringed by many products and services.
In other words, those patents have value. Today, that value is being transferred from users (operating companies) to owners (NPEs) via litigation. The resulting legal fees and court expenses generate transaction costs of 50%, proving that there are few, if any, more inefficient and wasteful ways to transfer value than the legal system.
The last part rings especially true for retailers. The legal fees and costs are astronomical for retailers, particularly as compared to the business “value” offered by licensing a troll, or defeating one at trial. Of course, reducing discovery costs and burdens would benefit retailers, but what is really needed is a more comprehensive solution that levels the playing field so that retailers, and other businesses, can make rational decisions about patent value, instead of simply being forced to pay cost of defense settlements or spend to defend.
What does a market-based solution look like and where does it come from? RPX has a solution, which it analogizes to changing the troll world the way Amazon changed how we purchase books and music:
The RPX approach is to solve this market problem with a market-based solution. We have shown that pooling the resources of our clients to acquire high-threat patents in market transactions is far and away the most efficient way to transfer patent value and to clear patent risk. Our model shares risk across a growing network of nearly 130 operating companies, ensures fair market pricing, and eliminates costly and wasteful legal steps from the process.
Simplifying a complex and inefficient market with a more logical transactional model is something Jeff Bezos can appreciate. Amazon revolutionized the retail industry. We believe the same principles that transformed how books, music, and more are sold can and will rationalize the patent market.
I will also explore other possible solutions as I provide more commentary stemming from the December 10 DOJ/FTC troll conference over the next several weeks.